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This Watchdog Isn't Asleep, It's Comatose

May 01, 1994

Top of the News: Commentary

THIS WATCHDOG ISN'T ASLEEP, IT'S COMATOSE

The year was 1990. Senator Albert Gore Jr. (D-Tenn.) was in a lather over the Treasury Dept.'s refusal to block the purchase of a key U.S. semiconductor-equipment maker by a Japanese competitor, Nippon Sanso Co. "Encouraging foreign investment is one thing. Allowing unrestricted purchases of key technologies is quite another," fumed Gore. To the Bush Administration, he charged, protecting America's technological jewels "is just a big joke."

So when Vice-President Gore was placed in charge of the Clinton Administration's technology policy last year, it seemed likely foreign purchasers would have a tougher time buying U.S. aerospace, telecommunications, computer, and biotechnology companies. But foreign investors needn't have worried. If anything, the agency that monitors foreign purchases of strategic U.S. assets, Treasury's Committee on Foreign Investment in the U.S. (CFIUS), has become even less aggressive. As a result, America is still being stripped of scores of cutting-edge companies. "The watchman is asleep on the wall," frets one high-tech industry official.

RELIEVED. Just how somnolent has CFIUS become? Despite 98 foreign investments in, or takeovers of, American high-tech companies in 1993, the panel didn't conduct a single investigation of the potential harm to national security, according to CFIUS data and figures compiled by the Economic Strategy Institute, a Washington think tank. Even the laissez-faire Bush Administration ordered CFIUS to conduct full-scale investigations of 13 foreign takeovers of sensitive high-tech companies from 1988 to 1992.

Gore evidently hasn't been paying attention, either. In April, Nippon Sanso notified CFIUS that it intends to buy its fourth U.S. maker of semiconductor gas-containment equipment. Gore's office, which didn't return BUSINESS WEEK's phone calls, has been silent this time. "The remarkable thing is how little the policy has changed from the previous Administration," says a relieved Christopher R. Wall, an attorney who represents foreign clients.

While overseas buyers may be pleased, congressional critics of the Administration's strategy are up in arms. Four House committee chairmen wrote Clinton last September to complain that CFIUS has no computerized database mn foreign acquisitions, no capacity for evaluating the issue from a broad perspective, and no permanent director. Nothing has changed since. And the committee has met only 10 times in 15 months. The General Accounting Office is investigating CFIUS' shortcomings in a report to be released in midsummer.

CFIUS officials and their supporters say there's no need to be more vigilant. After all, the number of foreign acquisitions of high-tech companies dropped by half since the 1990 peak. And foreign direct investment may be supplying needed capital to U.S. companies squeezed by declining defense procurement. Besides, the principal buyers--Britain, Japan, France, Germany--are strong U.S. allies.

True enough. But the issue now is economic security, not just military preparedness. And these acquisitions are starting to have some troubling consequences. The General Accounting Office, for instance, has noted the propensity of Japanese companies to reserve their most advanced technology for their own customers or keiretsu partners in Japan. And while Japanese investments in U.S. assets have fallen off, they are likely to rebound once the Japanese economy revives, particularly as a stronger yen makes bargains of U.S. companies.

EXPLOSION. A particular danger is that critical components needed by American manufacturers will be controlled by companies overseas. For example, the U.S. share of the $12.8 billion semiconductor-materials and -packaging market has dropped from 70% to just 8% since 1977, according to some industry estimates. Meanwhile, the Japanese share of semiconductor materials has climbed to 70%. The resulting vulnerability of U.S. manufacturers was made all too clear last July, when an explosion in Sumitomo Chemical's

Niihama City plant wiped out 55% of the world capacity for high-purity ECN resin, a key component in chipmaking. With Japanese producers dominating the market, their preferred customers got first claim on surviving inventory.

The Sumitomo explosion should have served as a wake-up call to the sleepy CFIUS. A revival of the panel may not actually lead to blockage of any foreign purchases. But at least it would give the public confidence that the White House is paying attention to the competitiveness of American high